Development and Underdevelopment in the History of Economic Thought

Modern Monetary Theory and the problem of liquidity preference in Circuit Theory

Laurent Baronian, CEPN, Université Sorbonne Paris Nord

Ever since the representatives of Modern Monetary Theory (MMT) embarked on a widespread media campaign to promote their doctrine, objections and criticisms have multiplied within the field of monetary heterodoxy. To varying degrees, these all point to the negligence, and indeed casualness of MMT in the face of the various market, monetary and financial constraints imposed on States in the implementation of ambitious monetary and fiscal policies such as Job Guarantee and the Green New Deal (Epstein, 2019). Certain commentators, such as Lavoie (2103), question some of its theoretical assumptions: the consolidation of the relationship between the Central Bank and the Treasury, their conception of monetary sovereignty that applies to most to the United States, and so on. But these objections are all based on an essential agreement, within circuit theory in general, on the nature of money, the sources and conditions of monetary issuance, and the role of the central bank in the payments system. Our hypothesis is that both the objections to and discomforts with MMT and its policies are part of the problem of liquidity preference, which has permeated circuit theory since its early formulations. We will then trace the debate around liquidity preference within post-Keynesian theory by showing how MMT emerges from a radicalization of the horizontalist approach to money. Following their elimination of liquidity preference, how to articulate the different functions of money when it presents itself as a pure flow of units of account? We will show how the disappearance of the value reserve function – despite its sudden revival after the 2008 crisis - weakens the distinction between money and credit, and therefore between the bank credit market and the money market, where the convertibility constraint of bank money into central bank money applies.

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Keywords: Modern Money Theory, Liquidity Preference, Circuit Theory

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